An independent review into the way the MOD buys equipment for Britain’s Armed Forces was published yesterday, Thursday 15 October 2009. [Report, MoD News Article, BBC News]. Key finding.

“The Ministry of Defence has a substantially overheated equipment programme, with too many types of equipment being ordered for too large a range of tasks at too high a specification. This programme is unaffordable on any likely projection of future budgets.”

That situation might sound familiar to a lot of managers, not just in the defence sector.

The explanation for the current crisis can be found in the essential multi-sidedness of the defence acquisition ecosystem. Traditional cost accounting approaches (such as activity-based costing) fail to address the complexity of this multi-sidedness, and researchers are urgently seeking alternative cost accounting methods appropriate for complex systems-of-systems.

One of the key issues for Through Life Capability Management is that any errors or omissions in the long-term equipment programme must be repaired through what are known as Urgent Operational Requirements (UOR), which over the long haul can prove far more expensive and inflexible than the planned equipment.

The report also praises the Smart Acquisition programme, and expresses regret that the disciplines of Smart Acquisition have been somewhat diluted by recent reorganization.

***

Is this report only relevant to the defence sector, or can other sectors glean anything useful? My view is that the complexities of multi-sided markets and asymmetric demand can be found in many, perhaps most sectors. And the question of coordinating effectively between short-term and longer-term spending can be found in many domains, notably IT. I have little doubt that whatever management tools and techniques are developed by the MoD and its partners to address this problem will eventually trickle into civilian management.

by Richard Veryard
We can use the three asymmetries to appreciate different strategies for security and trust, such as deperimeterization. First we need some definitions: Boundary refers to a discontinuity in a physical system, Perimeter to a discontinuity in a social system, and Edge to a discontinuity in systems of meaning. As with the asymmetries, these build on each other, so a perimeter includes a ‘virtual’ boundary, and an edge includes a ‘virtual’ perimeter. Thus where we place boundaries, perimeters and edges reflect where we place the three asymmetries. It also determines the way we are able to approach security and trust.

For example, deperimeterization can be understood as an effect of the third asymmetry. A traditional perimeter defence assumes that rights and obligations (social) coincide with certain physical divisions (boundaries). Deperimeterization means it is no longer feasible to align the levels of security with the social boundaries, because the social system is itself losing its cohesion under the influence of the third asymmetry.

Assuming symmetry means being able to run something as a closed system – the way it interacts is wholly defined by the supply-side, so control is possible. With the breaking of the first symmetry, the use of the technology is defined by its outputs, and not its internal functioning. But we can still apply a fortress approach to this, so long as we can wholly define the boundary across which the outputs are to be provided. The metaphor here is the fortress.

With the second symmetry being broken, our business changes from being defined by its outputs to being defined by its ability to organise business processes that deliver solutions. But the supplying business organisation is still in control of this, although the complexity of what is ‘inside’ is greatly increased by its now explicitly socio-technical nature. The fortress metaphor is still possible here, but understood now in terms of a dynamic frontline (e.g. Nato warfare across Europe).

It is with the third symmetry being broken that we get the necessity for defence in depth (they can strike from anywhere), asymmetric threat (they can play by their own rules), and agile/manoeuvrist conflicts that require power-to-the-edge and synchronization at the edge. This is the environment in which collaborative composition is necessary because of the complexity of the demand environment which you are trying to interact with. (The military metaphor here would be “operations-other-than-war” where you have to work with the inhabitants etc.) It is this latter third symmetry-breaking that creates the de-perimeterization effect.

Epstein comments on the fact that the big movie studios typically make a loss on the initial theatrical release (the advertising alone costs more than the box office receipts) which they hope to recoup from the overseas release and video sales.

On the old business model, the video sales (mostly to video rental chains) were pegged to the initial box office. So the higher the initial box office, the higher the subsequent (more profitable) sales.

But this kind of cross-subsidy is only possible if the movie studios are powerful enough to maintain a positional strategy. Changing patterns of demand – synchronous overseas release, collapse of the video rental market, increasing domination of DVD retail by mass retailers such as Wal-Mart and Tesco – have undermined this positional strategy.

There are increasing problems with cross-subsidy in many industries, as the once predictable linkages between the loss-making elements and the profitable elements are eroded. This in turn calls into question the integration logic (“North-South”) on which many large firms are (have been) based. To support a relational strategy instead of a positional strategy, such firms must develop a new kind of integration logic (“East-West”).

In his HBS March interview, Andrei Hagiu identifies Wal-Mart as an example of an organization that is transforming from a traditional merchant into a two-sided platform. Let’s look at the (asymmetric) structure of this transformation.

The traditional retailer acts as a hub in the food supply chain, aggregating food supply from fields and factories, and distributing food to workshops and private kitchens. This is essentially a positional strategy: the retailer seeks to establish and maintain a strategic position within a value chain, as the bottleneck/hinge point between upstream and downstream. Within the positional strategy, the business drivers are understood in terms of the economics of scale and the economics of scope.

But if we shift from a value-chain perspective to a service-oriented perspective (value-ladder), we can see that the retailer is providing a service (=delivering value) downwards as well as upwards – it is a food distribution platform for farmers and manufacturers as well as a food supply platform for consumers and catering companies.

So instead of drawing the merchant in the middle, we can draw the merchant as a new kind of platform providing various kinds of market interaction.
This takes us from a positional strategy to a relational strategy. No longer just focused on the economies of scale and scope, the relational strategy emphasizes how economies of governance are generated in relation to two kinds of demand context. The big question for a company such as Wal-Mart is how to balance the exploitation of each of these forms of asymmetric advantage.

In his Confused of Calcutta blog, JP Rangaswami (now CIO of BT’s Services Division) picks up a definition of Enterprise Architecture from Andrew McAfee: “IT that specifies business processes”.

JP argues that

“… enterprise systems work well only when there are rigorous standardised processes; they work well when these rigorous standardised processes are industrial strength, with external frames of reference; they work well when the number of processes is kept to an absolute minimum, and where process divergence and diversity is avoided.”

There may well be situations where it makes sense for the business process to be specified (=overdetermined) by IT. But there are other situations where this doesn’t make sense at all, because of the asymmetrical relationship between business and IT.

Are there intelligent ways of implementing enterprise IT without constraining (=overdetermining) the business, thus respecting the need for agility? We believe there are. But it’s probably not going to happen if it is left up to those “respectable” consultants who are the target of JP’s criticism.

The UK Government recently published a white paper describing a range of proposals designed to improve access to community healthcare services. The intention is to improve healthcare outcomes (including longterm outcomes) for individual patients while reducing the cost pressures on the system as a whole. Proposals include more outreach clinics, a regular healthcare checkup, and “joined-up” care plans.

The term MOT refers to the regular system of checks required for all cars in the UK.

These proposals appear to shift control of the patient’s healthcare experience closer to the patient, and at first sight might seem to be a sensible and appropriate response to the increasingly asymmetric demand facing the healthcare services.

But not surprisingly, the proposals have had a mixed reaction. One of the concerns is the assumption of triage. If we can separate simple cases from complex ones, then nurses and other professionals can take some responsibility for the simple cases, call in the doctors for medium cases, and send the most complex cases into hospital.

But this focuses the difficulty on the separation of simple from complex in the first place, which is not just an epistemological difficulty (what are the small signs that this might be meningitis or bird flu, rather than just a bad cold) but ontological (whose notion of complexity is to prevail). A nurse or pharmacist may deal with a backache simply as an acute pain; however, a doctor may be able to see the backache as the first symptom of a chronic disability. And a doctor with a longer-term responsibility for a patient may be able to see emerging patterns in the patient’s condition, that might not be adequately recorded in the patient’s health record.

Part of the difficulty is the conflict between the acute and the chronic. Dealing with a chronic condition as a series of acute episodes can be costly and ineffective for the healthcare organization, and typically produces inferior long-term outcomes for the patient. Indeed, acute treatment (such as painkillers) may interfere with (and therefore delay) the diagnosis of a severe chronic condition.

Of course, the doctors sometimes protest too much. They complain indignantly whenever they fear nurses invading their professional territory, but of course a lot of the triage is already done not by nurses and healthcare administrators but by the patients themselves – deciding whether a symptom is disturbing enough to justify seeing the doctor. After all, an unnecessary appointment with a doctor is not just a waste of the doctor’s time, it is also a waste of the patient’s time. Busy people often prefer to take a quick painkiller rather than hang around in a doctor’s waiting room.

And of course doctors are under extreme time pressure: they often spend their time prescribing painkillers and sometimes fail to recognize the chronic conditions. Clearly there’s a problem if the working practices of doctors are not conducive to the effective deployment of their expensive medical skills.

Much of the complexity of healthcare comes from the fact that health is (literally) embodied in the life of the patient; this means that doing healthcare properly means paying attention to the life of the patient. Think of the individual healthcare that a top sportsman gets – with every minor sprain carefully examined for its potential effect on sporting performance, and every medication assessed for its effect on energy levels.

But this is often the problem with asymmetric demand – a small number of highly privileged customers get an individually customized service, and everyone else has to accept a one-size-fits-all solution. Is there a way in which highly flexible and customizable long-term healthcare services can be made available to everyone, at a reasonable cost?

Oh yeah, technology. Health 2.0.

Taking power to the edge is difficult and fraught with resistance. The latest UK proposals are merely the latest in a series of similar proposals, going back over thirty years. BBC reporter Nick Triggle complains of Deja Vu, and lists some of the repeating initiatives from 1976 onwards.

Clearly, every reorganization has its perceived winners and losers. In an organization as political (small p) as the UK health service, every reorganization turns into a major battle about the control of healthcare. There is a legacy of suspicion and cynicism, sometimes interpreted as an institutional defence against anxiety. The centre talks about empowering the edge, while at the same time imposing further centralizing controls.

“Managing to contract” implies a two-phase procurement process. In the first phase, all possible scenarios are identified, and a contract is negotiated that defines rights and obligations for each scenario. In the second phase, the emphasis is on compliance with the agreed rights and obligations. Unfortunately, it is hard to find good sources for this phrase on the Internet. Most of the hits lead to the antique humour of “managing to contract disease“. In contrast, “managing to relationship” implies a degree of trust between the parties, and an expectation that issues will be resolved to mutual advantage. Under certain simplifying conditions, there may be no observable difference between managing to contract and managing to relationship. The greatest observable difference can be found in highly complex procurement arrangements, involving either long-running contracts, or a series of separate contracts within a long-running relationship.Managing to relationship may still involve detailed contractual negotiations, but the emphasis is often upon establishing a collaborative governance process, rather than an attempt to anticipate all possible scenarios.
Masood draws three axioms from Transaction Cost Economics:

Drawing on these axioms, we can see that the limitations of managing to contract are not just based on economic inefficiency (excessive transaction costs) but on ethical asymmetry – including asymmetric information and moral hazard. Managing to contract can produce destructive tactical behaviours such as chicken.

Chicken: the first party to flinch is the loser. So when a project is going off track, each party tries to ignore the evidence that things are going wrong, in the hope that the other party will bail out first and bear all the costs.

So there are some basic structural problems with traditional procurement arrangements, and managing to relationship won’t solve these problems alone.

In his book Information and Organization, Boisot identifies four stages in the knowledge cycle, which he associates with four organizational cultures. These can be associated in turn with different strategies.

Knowledge

Diffused

Codified

Culture

Industry
Cycle

Typical
Strategy

Public

Yes

Yes

Market

Competition

Cost-Based (Sub-
Contract, Outsourcing)

Proprietary

No

Yes

Hierarchy

Monopoly

Product-Based
(Licensing, Hoarding)

Personal

No

No

Network

Start-Up

Problem-Based (Trading,
Intention Economy)

Common-sense

Yes

No

Clan

Oligopoly

Service-Based (Joint
Venture, Mashups)

Philip characterizes Microsoft as following a product-based strategy. I think this characterization is supported by the comments made by Bill Gates in his Mix06 keynote – for example, his idea that Microsoft customers benefit from the existence of other Microsoft customers because a large user base helps Microsoft to improve the product.

Meanwhile, companies like Google and Amazon are following a service-based strategy, and the evidence from the way they are used in mashups shows others are using their services to make the ‘jump’ to start new cycles (see interoperability landscapes). Can they also make this ‘jump’ – to start a new cycle at the next level up? Should they? How would such a strategy be accounted for commercially?

Are we honestly supposed to believe it was a co-ordinated denial-of-service attack that brought down a demonstration application on Sun’s much-touted pay-as-you-go Grid service on the day of its launch this week?

Phil suggests that two explanations are equally plausible – one in terms of security and one in terms of unanticipated levels of demand – since these two explanations might both generate pretty much the same outcome.

In a symmetric world, there is a clear distinction between genuine customers and hostile attackers – and the task of security is to tell them apart and keep them apart. We can easily separate security from marketing, because there is no interference between these two activities. We can install perimeter-based security, which prevents bad people from accessing our services.

In an asymmetric world, this distinction (and the deconfliction between marketing and security) breaks down. This asymmetry is one of the key drivers for the current interest in deperimeterization, as promoted by the Jericho Forum.